Beating the Tax Man Offshore

The island country of Nauru, in the middle of the Pacific, is a place where Americans have found an ingenious new way to beat the IRS, according to the government.

Instead of just setting up an account in a foreign bank, Americans are now setting up an entire bank to make sure no one reveals to the tax man where their money is.

"You pay them several thousand dollars; you get a bank charter," IRS consultant Jack Blum explained. "There are some 400 bank headquarters in a shack without a door."

Blum says Nauru and other small island countries around the world are doing a booming business selling back licenses to wealthy Americans who want to illegally hide their money and cheat Uncle Sam.

"My estimate to you is that the United States is losing $70 billion a year in tax revenue," suspected Blum.

Until recently, the IRS had done little about going after such schemes even as promoters openly advertise them.

Among the most notorious promoters is Jerome Schneider, whose seminars on offshore banks in Nauru and elsewhere attract thousands of Americans to what he calls "legal tax avoidance."

"How many people are already offshore?" Schneider asked the attendees of the seminar, which was caught on camera. "Good. I like that," he nodded, clapping.

ABCNEWS first reported on Schneider's operation four years ago, taping undercover at a seminar in Cancun, Mexico, where one of Schneider's associates made it clear the Nauru bank was nothing more than a piece of paper: "There's no little building like this with a drive-in window, nobody's going to get a toaster when they make a deposit. There's no tellers. There's none of that," said Eric Witmeyer, a Los Angeles lawyer.

Last month, the IRS revealed it had been conducting its own undercover criminal investigation of Schneider, who has not yet been charged and defends the Nauru bank scheme — which the IRS labels "shams," a description Schneider has denied.

"They're not shams because they have licenses that allow them to operate," Schneider told ABCNEWS four years ago. "From the government of Nauru," he added.

Rep. Tauzin Caught on Tape at Seminar

In the middle of the investigation of Schneider, IRS investigators were stunned to find a prominent congressman, Rep. Billy Tauzin, R-La., speaking at one of Schneider's seminars in Canada.

Tauzin says he went as part of his campaign to eliminate the income tax altogether, not to endorse Schneider's schemes.

"Our purpose was simply to go out and encourage people to repeal the income tax code," said Tauzin. "And that's the only purpose."

When asked if he regrets going, Tauzin answered, "Knowing what I know, yeah, of course."

Tauzin's staff also provided Schneider with a quote from the congressman, praising Schneider's most recent book on offshore banking.

Tauzin said he regrets that, as well, and has demanded Schneider stop using it.

"[I] didn't read the book," said Tauzin. "Not interested in reading it."

He may not be the only one to be put in a bad spot by Schneider.

In a raid on Schneider's office last month, the IRS seized the names of thousands of his clients who signed up in the Nauru bank scheme and may soon find themselves under investigation.